You may have heard about the challenges that commingling of assets brings to a divorce proceeding. In this article we will discuss what the term commingling means and what you have to do to manage your financial risks.
When you think about divorce, you need to be aware of a concept called separate property (a.k.a. non-marital assets). If you are not familiar with this phrase, you may be leaving quite a bit of money on the negotiating table when it should be completely removed from the asset allocation process and assigned to you personally. If you put the separate property on the negotiating table you can significantly impact your current and future wealth position.
Separate property, by definition, is property that is outside of the marital estate. Separate property can come in many forms and originate from many sources. Whether it be a trust account where one spouse’s name is on the account, a family inheritance, a settlement from a personal injury lawsuit, a house owned prior to getting married, defaulting on a construction loan where the collateral is secured by the separate property, along with many other examples. No matter where the separate property originates or how someone perceives commingling exists, the crux of the argument is essentially the same. For one reason or another, one spouse believes that an asset should be off limits for the discussion of dividing the wealth of the parties. As frequently happens, the other spouse may respectfully disagree and want the assets to be deemed part of the marital estate subject to allocation. How do you handle this disagreement? Who acts as the referee when the parties cannot come to an agreement?
To determine whether the property should be classified as marital property or separate property, it’s important to analyze the context of the situation, capture specific evidence and ensure your story is communicated using a socratic messaging process. In context to divorce, if you commingle separate property with marital property the property can become what is often referred to as fungible with, or indistinguishable from, another property. In very simple terms, commingling funds means mixing property together where the separate property can no longer be distinguished from the then-current state of the marital assets.
For instance, if you and your spouse have a joint checking account where your paychecks are deposited, those funds are mixed together and are said to have been commingled. If those funds are used to purchase a house, very often that house will be considered to be marital property and subject to division between the parties as it was purchased with commingled funds.
During a divorce process, the issue surrounding whether funds have been commingled is examined with the goal to classify the asset in question as marital property or separate property. Marital property is subject to division in a divorce proceeding, while separate property is often off the table and not subject to division during a divorce. There are certain concepts outlined below that are commonly referenced to assess whether the property in question should be classified as marital property or separate property. Although beyond the scope of this article, even though a property is considered separate property, the appreciated value of the separate property may still be deemed marital property subject to allocation. It very much depends on the context of the situation and the details to prove the status of the classification.
To address the issue whether property has been commingled, it is important to analyze the following questions:
1. Is the property able to be definitively separated from its current commingled state?
This concept evaluates whether the boundaries of the separate property (i.e. the physical state of the property) is able to be physically separated and extracted from its current state with relative ease. The key issue around the separation process is to unequivocally create the same, or very similar, state of the property before it was commingled. If this issue can be satisfied then the next question to address is what evidence exists to demonstrate the ability to definitively segregate the part(s) from the whole property in question. In other words, can you present evidence that will convince a judge the process you utilized is of an acceptable standard where you have not disrupted the commingled state and clearly defined the boundaries of each property?
2. Can the property be traced back to its origins with absolute mental clarity?
This concept addresses the issue of traceability. Does an audit trail exist to allow someone to follow the source of funds, for example, back to its separate property state? If so, what evidence exists to demonstrate a logical process that defines where the funds came from, how they were used, the point in time they were commingled, how the tracing process worked, among other factors that are very important to manage through the process.
For example:
- If monies from a trust fund which was originally titled in one spouse’s name are used to purchase a home, the funds used to purchase the home may be able to be traced (via bank records, etc.) to its origins. If the evidence can stand on its own and bring a third party decision maker to the same logical conclusion, the home purchased may be deemed separate property not subject to allocation. The key is to ensure the decision maker can clearly understand the socratic thinking process.
- If, as mentioned earlier, a joint bank account which was funded by both spouses was subsequently used to purchase a home those funds will likely no longer be traced all the way back to their origin to claim separate property status. The funds would likely have been used for multiple purposes. Therefore, the home purchased may be classified as marital property subject to allocation between the spouses.
3. Was the property intentionally gifted in writing from one party to the other party?
If a document exists that clearly transfers ownership rights from one person to another (in part or in whole) this may change its classification from separate property to marital property and even possibly the other way too. It all depends how the process unfolded. An example to look at is if one spouse placed the other spouse on a deed of a home. The process of signing a refinancing application clearly shifts the classification from separate property to marital property. The ownership interests would therefore be deemed commingled and subject to allocation. If clauses existed in a separate agreement around vesting issues, among many other potential restrictions, there may be exceptions to the rule. Otherwise, the property is likely deemed commingled and subject to allocation in the divorce process.
4. What was the original intent of the party or parties effectuating the change in state?
If the intent of the parties can be clearly demonstrated that the property was supposed to be separate and non-marital, then the property may be deemed either marital or separate. Intent is often difficult to prove. When you approach this subject from a perspective of disproving the intent it makes it easier to prove the intent existed.
- For example, let’s assume a trust was setup for one spouse. Is there any evidence available to demonstrate the grantor intended for both spouses to benefit from the assets of the trust? This approach strives to prove that commingling was never the intent of the original grantor.
- Another example is if one or both spouses has written evidence (email, text, a promissory note, etc.) that stipulates the funds are meant to benefit both parties and that a transfer is going to take place. Once the transfer takes place, the intent (via the evidence) is clearly established to demonstrate the intent. If the evidence does not exist, the party who is questioning the situation has the burden of proof to prove otherwise. Without the evidence, it may be challenging to demonstrate the property is separate property not subject to allocation. If restrictions existed in the intent, then further questions arise which have to be diligently addressed on a case by case basis.
- To contrast to the previous example, let’s say one spouse takes funds from a non-marital trust and pays for a new roof for the marital home, then subsequently withdraws the same amount from a joint marital account and places that amount back into the non-marital trust. The argument could be made that the clear intent was to temporarily loan the marital estate the funds to pay for the roof and then recoup the funds when marital liquidity allowed. Without clear communication between the parties though, the inverse could be argued as well. You can see why proof plays such a big role in utilizing the intent of the parties in the classification of commingled assets.
Different states have varying case law and precedent how to address these questions. The critical question to ask is, “Who is making the ultimate determination of asset classification?”. When negotiating between the spouses outside of a trial setting there is virtually limitless flexibility to come to an understanding how the assets will be assigned along with the other facets of the divorce decree.
If you rely on a judge or another third party decision maker, such as an arbitrator, the flexibility to make a deal is gone and you are subject to whatever decision is made. How an asset classification is executed typically varies from courtroom to courtroom. There may be predominant precedent to use one approach in your state, though the judge has wide latitude to rule how they feel appropriate and utilize another method as they see fit and citing caselaw that fits their judgment.
It is absolutely crucial to be able to demonstrate what you feel is the proper approach and your evidence that your position is the right one. If a decision maker cannot point to demonstrable proof as a solid foundation for their decision, you may unfortunately receive a result you are not happy with. Evidence is key.
It is quite common to have disagreements around how commingled assets need to be handled in a divorce setting. If you need some help, don’t hesitate to reach out. My name is Ryan Burns. I am part of a firm called Divorce Outcomes. We are divorce finance experts focused on making sense of the economics of a divorce. Feel free to contact me at 978-821-9312 or email me at [email protected]. I will be happy to spend 30-45 minutes with you free of charge to discuss your concern. You can decide after our call if it makes sense to engage further.
About the Author
Ryan Burns
Ryan is a Divorce Finance Consultant at Divorce Outcomes, a specialty professional services firm that analyzes, architects and negotiates all of the financial aspects of a divorce to protect the wealth at risk.
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Disclaimer
This communication is for general informational purposes only which may or may not reflect the most current developments. It is not intended to constitute formal advice or a recommended course of action as every person’s situation is unique and different. The information here is not intended to be, and should not be, relied upon by the recipient to make a decision without professional guidance.